Bohai Pharmaceuticals Group (BOPH) is one of the thousands of tiny Chinese companies that few U.S. investors know anything about, but it's deeply engaged in that vast nation's mainstream business of making and distributing "traditional Chinese medicines." Such drugs are made mainly from organic and natural ingredients such as herbs and honey that the bulk of the nation's 1.4 billion people use to treat common ailments like back pain, asthma, influenza and heart problems.

Traditional Chinese medicines have been around for thousands of years, and the Chinese have come to depend on them. But people in the rural areas, where majority of the population resides, often can't afford them. So last year, the Chinese government started an expansive insurance coverage for 90% of its population, focused mostly on the rural areas where farmers and low-income workers live. The government's new insurance plan will cost it dearly – some $123 billion -- and Beijing aims to extend the help to the entire population by 2011.

That should be a huge boon to Bohai Pharmaceuticals, which is just starting to catch the eye of some U.S. investors. Although it's still a relatively tiny company, whose earnings in fiscal 2010 (ended June 30) totaled $9 million on sales of $58 million, it's one of the largest makers and distributors of traditional Chinese medicines. It provides prescription medicines to hospitals and pharmacies, and sells nonprescription drugs to retail stores in China's big cities.

No Plans to Enter the U.S. Market

Bohai's, stock, which started trading over-the-counter in the U.S. in January 2010 at $1.80 a share, is currently trading at $1.90, and is still very much unknown among investors in America. But as China's new extensive insurance coverage plan takes hold, some pros expect the pharmaceutical company to attract more attention in the U.S. They're betting that Bohai will become a "new China play" anchored on an accelerated growth of the pharmaceutical industry in that country.

Analyst Patrick A. Murphy of Murphy Analytics figures the company has the potential of boosting its earnings to $7 a share in 2011 and to $11 in 2012 based on the Bohai's projected sales and earnings.

"In time, we expect U.S. investors will come to recognize Bohai's solid fundamentals based on the fast growing demand for its products in China," says Bohai Chairman and CEO Hong Wei Qu. He says Bohai doesn't plan on selling products in the U.S. anytime soon. "Demand from our markets in China are huge enough to keep us busy for some time," he adds.

Products With Government "Protection"

Although the roots of traditional Chinese medicine date back thousands of years, "Bohai's manufacturing and operational procedures are the most modern and most advanced," says Hong, who made a presentation last week to U.S. institutional investors, analysts and brokers at the Rodman & Renshaw Annual Global Investment Conference in New York.

He says the government regulates the manufacturing of traditional medicines and demands high production quality, safety and efficacy before approving them. Bohai's products are among those that carry government "protection" that's equivalent to patents. Bohai produces 15 traditional pharmaceutical products and has been issued licenses to produce 29 products, all derived from herbal and organic sources in both prescription and over-the-counter products.

The company's production facilities in Yantai City in Shandong province is a state-of-the-art facility "that meets or exceeds the government's "Good Manufacturing and Quality Management Practice" standards, notes Murphy Analytics.

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Bohai's CEO Hong says the company will strongly benefit from the government's expansion of insurance coverage to people in the rural areas because that would constitute a new large market of farmers and other low-income workers now be able to buy medicines through insurance reimbursements. One of Bohai's two flagship products is a nonprescription drug that treats lung ailments, and the other is a prescription drug for severe arthritis.

"The government insurance-driven medicine sales in the rural areas will be a huge contributor to Bohai's future growth," says Gordon McBean, head of capital markets unit at Euro Pacific Capital, which owns shares and has done banking for Bohai. The macroeconomic environment in China, he says, bodes well for the expansion of Bohai's market share given the growing demand for traditional medical cures.

Bottom-Line Prospects

According to McBean, Boha is still a very much undiscovered stock and one of the most undervalued Chinese stocks trading in the U.S. based on its growth potential and earnings capability.

So what are Bohai's bottom-line prospects in China? Murphy Analytics estimates that it has the potential of sustaining strong sales growth through fiscal 2012. In a reported dated Sept. 10, 2010, Murphy Analytics figures that earnings will climb to $13.9 million, or 48 cents a share, on projected revenues of $77.5 million, jumping to 78 cents in fiscal 2012 based on estimated revenues of $96.8 million. Gene Hsiao, chief financial officer of Bohai, says the company hasn't yet provided any guidance about future sales and earnings.

Considering the wide popularity and appeal of traditional medicines in China, it looks like a healthy bet that Bohai could be an even bigger player in that country's medical industry -- and it could be an attractive investment.